Vijay Kumar Gaba: ETF

Thursday, August 27, 2020

Robinhoods may not last long

Continuing from yesterday (see De-institutionalization of household savings)

It is important to note that investors moving away from passive investing to active investing is not an India specific phenomenon; rather it is a global shift. For example, there is massive outflow of funds from equity mutual funds in US, while benchmark indices have been scaling new highs. This outflow of funds has coincided with the tremendous rise in "Robinhood" investors - people buying and selling stocks directly on discount brokerage platforms.

As Sanjay Satapahty, a fund manager at Ampersand Capital, highlights "Trend of ETF was a megatrend over last decade and the reversal can have huge implications." (see here)

In past five months we have seen some glimpses of the likely implications for the market, should the shift from passive investing to active investing sustains over a longer period. Since the market bottom in March 2020, the small cap stocks (+73%) have outperformed the benchmark (+51%) and Midcap (+57%) significantly. The sharp small cap outperformance in June and July has coincided with the net outflows in equity mutual funds since middle of June 2020.

This outperformance has come on the back of massive rise in market volumes in value terms; number of daily trades; quantity of shares traded daily; and positive market breadth. It is also important to note that this has happened with no major change in implied volatility, much stricter margining norms and no significant rise in leverage.

I find that the following factors behind these trends-

(a) Dismal performance of asset managers (mutual funds as well as PMS). Most fund managers have disappointed the investors who were given high hopes through aggressive "Mutual Fund Sahi Hai" campaign. There have been many instances of impropriety and unethical practices, especially in case of PMS. This might have led the investors to take the things in their own hand.

(b) The socio-economic lock down due to outbreak of COVID-19 has rendered many people jobless. Besides many businesses have been working at zero or sub optimal capacity reducing the working capital requirement materially. Many of the jobless individuals and idle businessmen with cash may have started trading in equities in order to generate some income.

(c) Many young professionals who have been told to work from home, may have found spare time, which they are utilizing in trading in stocks. (For more details see "Rise of Retail Investor")

My primary view has been that this trend of "Robinhood investing" may not sustain as it prevails presently. Nonetheless, we may see the following corrections in the markets over next one year or so:

(a) The top heavy indices may inspire changes in the methodology of stock market index construction. Till then-

(i) The diversified funds may take precedence over ETFs based on benchmark indices.

(ii) Index heavyweights may either stagnate or see correction in prices and broader markets may remain more active.

(b) The compensation and performance evaluation rules for professional asset managers may see material changes to make them more accountable

(c) As the economic activity picks up from 2021, the part time investors and traders may return to their jobs. Also, the spare working capital of partially operative businesses may also flow back to routine business. This should mark the beginning of the decline of Robinhood investing.

Tomorrow I shall share my technical view on the Indian equity markets.

Wednesday, March 11, 2020

Who is accountable for PSUs' conduct

The government of India has been the greatest value destroyer for the investors in Indian Equities. The Nifty PSE index, comprising most listed PSU stocks, now trades at the same level as it was in 2006, implying no return for 13yrs, if we consider point to point investment period.

The CPSE ETF comprising top 22 Central government undertaking stocks, launched in 2014 is giving negative return to its investors.

Many large Public Sector companies are now trading at multi year low prices, adjusted for all dividends and other corporate actions.

The government of India therefore has legal and moral duty to explain to the investors, why it should continue to manage these businesses. They have obviously not managed these great businesses like MTNL BEL, Coal India, etc well and destroyed huge wealth for the nation as a whole and individual investors as well.

The Supreme Court may like to examine, whether the government should be permitted in the first place to raise equity from investors through sale of minority stakes, given that the Constitution of India requires the government to be "Socialist" and not indulge in profit making at the people's expense. Or at least it must consider extending the provisions of the Companies Act relating to oppression of minority shareholders and mismanagement to the listed government companies.

The market regulator must consider bringing the concerned ministers and bureaucrats from the respective operating ministries and departments within the regulatory framework for disclosures and investors protection.

In an unrelated but important matter, the finance minister publically admitted that the RBI and the government were aware of the mismanagement and impropriety issues at Yes Bank since at least 2017. Considering that Yes Bank is a constituent of Nifty and Bank Nifty indices. The National Pension Scheme (NPS) is permitted to make equity investment only in ETFs based on benchmark indices. This means the government deliberately let the money of the subscribers to NPS (mostly government employees and small poor investors) to be invested in Yes Bank at a price of over 300, despite knowing that it is a bad bank. This is a blatant breach of trust, which needs to be investigated and punished.

If the government wants to build clean, accountable and strong corporate and financial systems, it will have to begin the work from itself and show the path to others. The other way round has never worked; it never will.